Conditions for listed businesses improve but outlook clouded by late spike in profit warnings not seen since financial crisis
21 October 2013
- Highest level of profit warnings in September since 2008
- Divide in fortunes between larger and smaller listed companies
- Zero warnings for FTSE General Retailers and FTSE Construction & Materials
- FTSE Food Producers issue highest number of warnings since 2011
LONDON, 20 OCTOBER, 2013: UK quoted companies issued nearly 20% fewer profit warnings in the third quarter of 2013 compared to the same period last year, but there was a sting in the tail for UK plc as a more unsettled global economy shook confidence, leading warnings to rise to their highest level in September since the height of the financial crisis.
Adding to the mixed outlook, company size divided fortunes in Q3 - as it has throughout 2013 – with profit warnings from companies with a turnover under £200m rising 6% in the first three quarters of 2013 compared to the same period of 2012. This is in sharp contrast to a 30% fall in profit warnings from larger companies, according to EY’s latest Profit Warnings report.
In total, there were 56 profit warnings in the third quarter of 2013, down from 68 in the same period of 2012 but two more than the previous quarter, and with a spike of 26 warnings in September - the highest number of warnings in this particular month since 2008.
The rise in activity across most parts of the UK economy helped profit warnings to fall in almost all FTSE sectors. Those with the highest number of profit warnings in Q3 2013 were FTSE Support Services (13), FTSE General Financial (6), FTSE Software & Computer Services (5) and FTSE Media (5).
Global uncertainty muddies waters for UK plc
Keith McGregor, EY’s head of restructuring for Europe, Middle East and Africa, says, “Overall, the economic outlook is still improving, as the fall in warnings suggests, but expectations have dipped. US fiscal battles, taper concerns and emerging market volatility all provided reminders this summer that we’re long way from any kind of economic, financial or monetary normality and the road back won’t be smooth.
“There is also a sense that we’re moving onto the next stage of the recovery, where growth will be more vital to profits. In the last few years, companies used a mixture of cost cutting and operational improvements to boost earnings but now we’re seeing a combination of deep operational restructuring – including strategic divestments – coupled with economic growth. However, any doubts as to the path of that growth will quickly reflect in forecasts.”
Fortunes divide giants and minnows
If profit warnings are any indication, the recovery is leaving one critical group of companies behind. Smaller companies – those with a turnover under £200m - have issued more profit warnings in the first three quarters of 2013 than over the same period in 2012 (118 vs 111 respectively). This compares with a 34% fall in profit warnings from companies in the £201m to £1 billion turnover band (56 to 37).
Figures from the AIM market tell a similar story. The percentage of Main Market companies warning has dropped steadily, from 9.1% in Q4 2012 to 3.4% in Q3 2013, while the percentage of AIM companies warning remained static over the same period at 4.4%. Almost all AIM companies issuing a profit warning in 2013 had a turnover under £200m.
Alan Hudson, EY’s UK & Ireland head of restructuring, explains, “Smaller companies are inherently more vulnerable to profit warnings since they are more likely to find a squeeze on sales or change in pricing material to profit expectations, although this doesn’t entirely explain why their fortunes are diverging now.”
McGregor adds, “It could be due to their relative stock market age. The average listing date for Main Market companies is 1992 compared to 2006 on AIM, giving Main Market companies more experience of recession and recovery, and dealing with analyst and investor communities.
“That could exacerbate the greater difficulties smaller companies can face with funding, which will make it more difficult to plan and make the best of the upturn. Whatever the reason, if the earnings of smaller companies are recovering less quickly than expected, they may be less able to drive economic and employment growth - and that has implications for the entire economy.”
Food, glorious food
There were three profit warnings from FTSE Food Producers in Q3 2012, the highest number since 2011. However, considering the combination of pressures the sector has handled this year, from the horsemeat scandal to tough markets in Europe and a slowdown in emerging markets, 15% of the sector warning in the last 12 months is arguably a strong performance.
Retailers bask in rising summer sales
For only the second quarter since 1999, the FTSE General Retailers sector didn’t issue a profit warning. The recent rise in consumer spending and hopes for a merry Christmas gave retailers reason to remain optimistic, although the festive season normally shakes out winners and losers.
Hudson says, “The third quarter brought a steady stream of good news for retailers. The housing market moved up another gear with a further boost from “Help to Buy”, the Bank of England told consumers that it didn’t expect to raise interest rates until 2016 and the good weather added to the general feel-good factor.
“Last year’s ‘summer of sport’ complicates year-on-year comparisons, but UK retail momentum was certainly more positive than it has been for a while. However, there are still are concerns about the durability of this retail revival while inflation continues to outstrip wage rises.”
Business investment key to sustainable recovery
McGregor says that while it is an improving economic picture, concerns over the strength of the recovery remain, “The sustainability of the pace of recovery, slowing emerging market growth, tighter monetary policy and the threat of a US default appear to have combined at the end of the third quarter to temper confidence, earnings expectations and ultimately demand.
“The UK recovery is still based upon consumers, who are providing the impetus for growth, but are yet to feel the benefit. Increasingly optimistic business surveys imply that wages and investment will provide the UK recovery with greater breadth and stability in 2014. However, for now, companies still appear discouraged from matching optimism with investment. Removing this trepidation remains the key to establishing a more stable and sustainable recovery.”
Download Profit Warnings Q3 2013 1Mb, October 2013